The European PVC industry, which is heavily reliant on local construction markets, has not recovered significantly from the downturn suffered in 2009, after the credit crunch hit.

During the second half of 2011, Europe's PVC capacity utilization was slightly above 70%, well below the peak of 91% in 2007. Producers have had to adjust plant rates to meet demand levels, as tight credit conditions have led to a new operating environment where market players refuse to hold inventories for any longer than strictly necessary.

During the first quarter of 2012, although demand has improved, manufacturing constraints in Europe's chlor-vinyl and upstream ethylene markets have prevented PVC producers from improving operating rates.

According to Belgian industry organization Euro Chlor, European chlorine production in February 2012 was at 748,610 tonnes, the lowest level registered since 2009, which was the worst year on record for Europe's chemical industry.

Average European daily chlorine production for the region comprising the EU27, Norway and Switzerland stood at 25,814 tonnes in February, down by 4.8% from 27,114 tonnes in January and 10.6% lower than in February 2011.

PRICES

Very little chlorine is traded on the merchant market, with most output used captively. The value of the electrochemical unit (ECU), which is the combined market price of 1.0 tonne of chlorine and 1.1 tonnes of caustic soda, is the sector's economic measure. Producers say margins are under pressure, particularly from high energy costs.

TECHNOLOGY

Chlorine and its coproduct, caustic soda, is made by the electrolysis of brines using mercury, membrane or diaphragm cells. For every 1.0 tonne of chlorine, 1.1 tonnes of 100% caustic soda is produced.

The more environmentally sound membrane process is replacing mercury and diaphragm technology: Europe has pledged voluntarily to phase out the mercury route by 2020.

Euro Chlor says that membrane technology now accounts for just over half - 51.2% - of installed capacity at its member companies. The mercury process accounted for 31.8% at the beginning of 2011, while the diaphragm route still accounts for just under 14% of total capacity. Euro Chlor adds that energy consumption per tonne of chlorine has been reduced by some 10% over the last ten years.

OUTLOOK

Demand for chlorine in Europe is expected to contract further this year, as eurozone government austerity measures are forecast to delay public investments and activity in the construction sector, which represents more than 60% of PVC's end-uses.

Overall chlorine capacity is expected to continue declining because of industry restructuring and rationalization, while domestic demand into the PVC sector will be dominated by construction activity in the Eastern European markets.

In addition, European chlor-alkali players that have substantial geographic diversification will be less vulnerable to economic downturns than their smaller, regionally focused peers.

Author: Abache Abreu and Elaine Burridge

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